Articles published in April, 2007

Having recently acquired a personal video recorder, I find myself using the time-shift facility when watching commercial TV.

I start watching a programme around 15 minutes after it has commenced broadcasting – by doing this, I am able to fast forward through the adverts. Am I breaking my ”contract” with the broadcaster by not watching its adverts, and do I miss out on some products that might be of value to me?

Next time someone knocks on your door or telephones you and tries to persuade you to switch electricity suppliers, try to do better than a fellow who, to spare his blushes, I’ll just call ”Mr Blockhead”. According to research by two British economists, Chris Wilson and Catherine Waddams Price, Mr Blockhead managed to make himself ₤100 a year worse off by switching, rather than choose a tariff that would have saved him ₤50 a year.

Mr Blockhead isn’t alone. Another genius had such an uncompetitive tariff that he could have saved ₤150 a year – but he somehow managed to find an even worse tariff and switched to it. Of 250-odd people who had moved supplier with the avowed purpose of saving money, most picked up less than half the available gains, and about a quarter actually made themselves worse off.

For some people, this is reassuring confirmation that they’re not alone. For economists, it’s worrying. We’re now used to analysing markets where customers don’t always switch to the cheapest deal. Sometimes it is costly to search for alternatives. For example, you might want a cheaper cup of coffee, but not want to wander around trying to find one. At other times, it’s easy to see a cheaper alternative, but still reject it – perhaps you need to pay by direct debit and would have to fill in a lot of paperwork.

But Mr Blockhead went to all the trouble of searching and switching, yet still managed to pour money down the drain…

Review: More Sex is Safer Sex: The Unconventional Wisdom of Economics, by Steven Landsburg

A new book has appeared on the tottering pile of popular economics tomes on my desk, and appropriately enough it is a welcome return from the writer who laid their foundation back in 1993 with The Armchair Economist.

Steven Landsburg writes beautifully, is very smart and very creative, and I loved his new book. Some will hate it, but then Mr Landsburg won’t mind that at all: he has long taken a mischievous pride in offending sensibilities.

More Sex is Safer Sex is a collection of short essays – often based on Landsburg’s long-running column in Slate – exposing the economics deep beneath the surface of life. His opening chapter explains that if sexually reserved people slept around a bit more, we’d all be at less risk from sexually transmitted diseases, because we’d spend less time sleeping with a small number of sexually active, very risky partners. Sexual restraint, therefore, is rather like pollution, and it would be nice to find a policy to encourage less of it. Landsburg casts around for a solution but doesn’t find one that totally satisfies him, and then he’s off to the next subject, by which time both the verve of the writing and the edginess of the arguments are obvious.

Subsequent chapters cover politics (give every American an extra vote to cast in a different district, so that voters can punish pork-barrel politics), fire-fighting (let fire crews keep all the property they save, but watch out for arson-for-profit) and jury service (give jurors financial incentives to reach the right verdict, and hold a few fake trials to keep them honest)…

One of the most prestigious awards in academic economics, the John Bates Clark Medal, has been awarded to Susan Athey, a professor at Harvard University. Professor Athey, 36, is the first woman to win the Clark Medal, which is awarded every two years by the American Economic Association to a leading academic economist under the age of 40. Many previous winners have gone on to receive the Nobel memorial prize in economics, but the Clark Medal is a better guide to the current cutting edge of the discipline.

Professor Athey made her reputation by reinforcing the foundations of traditional game theory, showing how businesses might respond to risk, and applying that insight to auctions, industrial structure and macroeconomics. Her econometrics – the statistical analysis of economic behaviour – was also mentioned in the prize citation.

“Susan’s work on the foundations of economic theory has been of fundamental importance, showing economists when they can have confidence in their ‘equilibrium’ theories and when they can’t.” said Paul Klemperer, Professor of Economics at Oxford. “The sheer range of her work is also impressive.”

This award is something of a return to traditional values for the AEA; recent winners have addressed more esoteric topics. Matthew Rabin (2001) studied the interaction of economics and psychology, Daron Acemoglu (2005) the economic causes of dictatorship and the effects of colonialism, and Steven Levitt’s (2003) research was idiosyncratic enough to form the basis of a best-selling book, “Freakonomics”.

Nevertheless, Professor Athey’s award is not a surprise. “Susan has been a favourite to win this prize since she left graduate school,” Professor Levitt commented.

Professor Klemperer, who first met Athey when they overlapped at Stanford University, agrees. “When she hit the job market she was obviously a star – perhaps the star of that cohort.”

She became famous in the economics profession for having been so in demand – and so unwilling to turn anybody down – that she presented her work to 25 departments.

She was also noted for her work ethic as an untenured professor, which was Stakhanovite even by the standards of her peers. One important breakthrough came on Christmas eve, when the rest of her family were all asleep.

Professor Athey has complained in the past that female economists lack role-models in a male-dominated profession. This award is a big step towards changing that.

I am writing for childcare advice. I have two daughters, aged three and six months. The younger child sleeps in bed with us, the older child in her own room.

Since the new baby arrived, the older child hasn’t been sleeping well. I am worried that she may be suffering from some sort of sibling anxiety. It causes us problems too, because when she wakes up she walks to our bedroom and often wakes up her sister. Should we be consulting a child psychologist?

”Your money or your life.” The choice traditionally presented by the highwayman is supposed to have only one sensible answer. Money is, after all, no use to a corpse. Yet economists often study something rather like the highwayman’s offer in an attempt to uncover the answer to an important question: how much is your life actually worth?

Like many awkward questions, this is one that has to be answered. Safety regulations save lives but also raise the cost of doing business, a cost we all pay through higher prices. Are they worth it? Our taxes pay for life-saving spending on road safety and fire fighting. Are they high enough, or too high?

So how much are we willing to spend to save a life? A traditional planner’s approach used to be to measure the value of wages lost due to death or injury. That’s dreadful: it confuses what I think my life is worth with what my boss thinks my life is worth.

So an alternative is to ask people how much they would pay for a safer car or kitchen cleaner. But such surveys do not always produce sensible results. Our answers depend on whether we’re being offered a safer ₤10 household cleaner and then asked if we want the more dangerous ₤5 version, or whether we’re offered the ₤5 brand and then asked if we’ll pay ₤10 for the safer product. People often answer ”no” to both questions, contradicting themselves. These inconsistencies mean that we’re either irrational or lying to pollsters, and perhaps both.

Following the sudden and unexpected cessation of romance with a sustainable economic development researcher, am I due any recompense for giving up Christmas with my family and investing emotionally and financially in both a transatlantic flight and 11 of my 20 days of annual leave, given that there was the suggestion that ”next year we can spend it with your family” or indeed, that there would be a next year at all?

A lot of people think it a good idea to reduce the amount of carbon dioxide we pump into the atmosphere. But not many have sensible ideas about the correct way to do that.

One contributor to the FT recently asserted that, ”An individual carbon trading scheme is more equitable and effective than carbon taxation as it reduces consumption quickly and dramatically.” All that carbon dioxide has clearly addled his thinking. It isn’t possible to work out whether rationing would reduce emissions more than a tax until you know what the tax might be, or how generous the ration.

When it comes to reducing carbon emissions, the question ”How much?” is separate from the equally important question ”How?” The sensible choice is between a carbon tax and some kind of scheme to trade pollution permits. (Politicians prefer to bung cash at favoured initiatives; it’s in their nature, but makes environmental gains harder to come by.) And for any level of environmental tax you can get the same carbon price and emissions reduction by using a permit quota instead.

That doesn’t mean the two systems are equivalent. One difference is the cost of administering the system. Matt Prescott, the director of a Royal Society for the encouragement of Arts (RSA) research project into personal carbon allowances, paints an exciting picture of cheaply loading your carbon permits on to a credit card. I think it would be simpler just to administer a tax. A second difference is where the revenue goes. A tax directs cash to the government levying it. A lot then depends on how the revenue is used: if it’s distributed more heavily towards the poor, taxes are more progressive than a personal carbon allowance.